The underlying valuation anchor that prices credit over the cycle is the cash flow generated by corporations that is available to pay back debt and interest expense. In recessions, the information flow is the most negative of the cycle, raising the most doubt about payback ability. At the peak of the cycle, the gestalt created by the information flow is most positive, and default risks seem most remote. However, by definition, it is at the peak that the gestalt begins to shift in the negative direction as the first cracks begin to appear from those who have gotten themselves overextended.
